Hong Kong exchange asks China for time to implement tax rules on cross-border deals

By Saikat Chatterjee

HONG KONG, Aug 29 (Reuters) - Hong Kong's stock exchange has

asked Chinese regulators to give investors time to adjust to any

tax rules agreed upon as part of a closely watched cross-border

share trading scheme, two people briefed by the city's stock

market operator said.

Foreign investors are concerned that the new tax rules could

come into force immediately after the scheme is launched,

allowing them no time to make the necessary adjustments. There

are also worries that the Chinese authorities would apply any

taxes retroactively.

The Hong Kong Exchanges and Clearing Ltd is

currently negotiating the terms of the scheme, called Hong Kong

Shanghai Connect, with the China Securities Regulatory

Commission (CSRC), the mainland stock regulator. The scheme is

likely to be launched in October.

"Our communication to them is very clear that if and when

the new tax rules become effective, we need an exemption period

to implement those rules and the new rules shouldn't be with

retrospective effect," one of the sources present at a briefing

with HKEx told Reuters.

The person declined to be named due to the sensitivity of

the matter. The HKEx declined to comment. The CSRC was not

immediately available for comment.

The scheme will allow investors to trade Shanghai-listed

shares via the Hong Kong stock exchange while mainland investors

will be able to trade Hong Kong-listed shares via the Shanghai

Stock Exchange.

Currently, China slaps a 10 percent capital gains tax on all

stock purchases made on the mainland, but this tax has never

been collected on shares purchased under a range of cross-border

foreign investment programs, including the Qualified Foreign

Institutional Investor (QFII) and the Renminbi Qualified Foreign

Institutional Investor (RQFII) schemes.

Hong Kong does not impose capital gains tax on share


China's tax regime for QFII and RQFII has been in limbo

since the schemes were first introduced because its tax rules

only recognise investors from countries with which Beijing has a

tax agreement.

The exemption period requested by the HKEx would allow both

regulators more time to enforce a uniform tax regime for all

trading schemes, the sources said.

The regulators will begin market rehearsals on the Hong Kong

Shanghai Connect trading scheme this weekend.

James Badenach, partner at the financial services tax unit

of Ernst & Young in Hong Kong, said the final decision on the

tax rules may not rest solely with the CSRC as China's State

Administration of Tax and finance ministry, as well as the Hong

Kong regulator, all have a say.

"They are one of a few key stakeholders in the tax policy

deliberations," he said.

(Additional reporting by Michelle Price; Editing by Miral